Yet more anti tax fraud measures for Spain - the M720

Here are details of the Stick that followed the tax amnesty Carrot. If there was ever a piece of tax law that needed thought, this is it!

2012 proved to be one of the most exhausting years in terms of the amount of new law. New tax regulations were certainly one of the main focuses for the Government.

The so called "tax amnesty" was especially significant and the Government claimed that this scheme, which expired on 30 November 2012, would collect approximately 2,500 million € in tax. In the end only 1,200 million € was collected.

However, at the end of October only 150 million € had been collected. Leaving things to the last moment is a characteristic for taxpayers the world over and Spanish residents certainly did not disappoint. However, it was quite astonishing to see the last minute panic in November to make use of this amnesty.

The amnesty tax rate was only 10%, and resulted in the disclosure of 12,000 million € of undeclared income generated from hidden assets. In the main, the disclosures were made by Spaniards but more than a handful of foreign residents chipped in too! So it turned out that it was a significant achievement for the Government.

So, what on earth could have provoked such a last moment response? Why did so many take the opportunity to regularise their financial situation?

We believe that one of the key factors was the Law 7/2012 published on 30 October 2012, developed by Royal Decree 1558/2012 of 15 November.

This law introduces a new tax declaration to be filed before the end of March each year, starting in 2013. Exceptionally for this year, deadline has been extended until the end of April. Tax resident individuals, companies and permanent establishments, now have the obligation to file a special declaration disclosing the ownership of all non-Spanish assets. This includes foreign bank accounts, real estate and rights over properties, shares, loans, annuities and all types of investment assets and products.

It is really important to mention that this annual disclosure is not just required in the case of simple ownership of foreign assets but also for persons or companies that are beneficial owners, or when they directly or indirectly and by whatever legal mechanism have 25% control or more of foreign assets. This is clearly meant to catch beneficiaries or settlors of trusts, foundations and other legal structures.

The filing of this special annual declaration does not involve paying any tax as it is for information only. However, having given the tax office all this information, they are bound to check that income and wealth has been declared in the relevant declarations!

The bad news is that the fines for not filing this declaration or failing to disclose an asset start at the punitive rate of 10.000 €, so it is imperative to check to see if this new tax declaration applies to you!

At this point I think I should explain the worst possible scenario. This analysis takes account of several other recent changes in the regulations.

If in the future the tax office discovers that a Spanish tax resident owns an undeclared foreign asset it would have the right to presume that the whole asset value represents undeclared taxable income. Through the inspection process, the tax office would regard the asset cost as general income generated in the oldest of the non prescribed tax years (e.g. four years ago). Taking account of tax rates that vary between 24% and 56% in various parts of Spain (25/30% corporation tax for companies), the potential fines of 150% of the unpaid tax, late payment interest plus the fines for failing to disclose, the total payment to settle with the tax office would almost certainly be substantially more than the value of the hidden asset.

If you were tax resident in Spain in 2012, now is certainly a good time to analyse your worldwide affairs to make sure that, whether by omission or error, you do not suffer from this rather grim new legislation.

We see a surprising number of cases where the undisclosed foreign assets do not, in fact, represent much of a problem and we can sort it all out by re-filing a few income and wealth tax declarations and paying a small amount of tax.

This simple solution then allows the new declaration to be filed without any worries.

As mad as it sounds, sometimes paying a little more tax is a very good idea. If nothing else it can provide a good night's sleep!